We all know how much we get paid before tax, but how many know what is left
after the taxman has taken his share – and after we have received all the
services provided by the state?

Last week a report captured headlines when it warned that a huge and growing slice of the income tax burden was being borne by a tiny proportion of high earners.

The Institute for Fiscal Studies (IFS) think tank pointed out that just 300,000 very high earners, out of about 30 million income tax payers, paid 30pc of all income tax. It said that over a period the income tax burden had been pushed increasingly on to this narrow band of top earners.

But how does the rest of the tax burden spread out?

The givers and the takers

Britain’s tangled mix of taxes and benefits means it is difficult to see at a glance who are net contributors to the state and who are the net beneficiaries. But the main graph, right, spells out the answer by splitting all households along the line of average annual earnings into 10 “deciles”. These are the figures shown at the bottom of the chart.

Number-crunchers at Smith & Williamson, the accountancy and investment group, then computed the benefits received and taxes paid, on an average household basis, for each group.

It showed that the top 40pc of households, ranked by earnings, carried the burden. The lower-earning 60pc are net beneficiaries of the system, taking more back in benefits than they contribute in the many forms of tax to which we are all subject.

The point at which a household switches from being an overall “taker” to a “giver” is where disposable income, after all taxes and benefits are taken into account, passes a threshold of about £27,000, Smith & Williamson found. This would be where a household’s gross income fell somewhere between £35,000 and £38,000.

At that point a household is receiving benefits and paying taxes to the extent that the two cancel each other out. Above that, more tax is paid than benefits received, and vice versa.

Numerous factors are involved, encompassing individuals’ many, two-way transactions with the state. Say a household’s gross income was £39,000. It would enjoy benefits worth just under £12,000, while contributing almost £13,000 into various tax pools, making it a net contributor by about £1,000. Its disposable income would be about £27,000.

The taxes and other forms of “paying in” used in the calculations include direct taxes such as income tax, National Insurance and council tax, as well as more than 15 “indirect” forms of tax covering everything from VAT, alcohol duties, stamp duty on housing transactions and television and vehicle licensing. The figures are derived from government data about household spending habits, collated by the Office for National Statistics.

The forms of receiving benefits or “taking out” of the system are similarly wide, including “benefits in kind” such as housing and travel subsidies and average usage of state education and the NHS.

The figures and calculations portray a snapshot at a given moment. They do not factor in the changes that households’ incomes undergo over time. So a household whose income drops, for example, when one or both earners retire, could switch immediately from a high to a lower decile group.

But our chart reveals the extent to which the tax take racks up at the higher end of the earnings scale. The lowest-earning 10pc of households, with a gross income of just over £10,000 and a disposable income of £8,850, are net beneficiaries to the tune of £9,539.

For the next two deciles up the earnings ladder, as the graph shows, the net benefit is higher, reflecting the effect of tax credits and other measures aimed at rewarding lower earners. After that the graph tails down smoothly, until a steep drop in the ninth and 10th deciles.

For a household to be in the richest decile its gross income would be £101,000. Benefits enjoyed would be £7,217, and contributions into the system almost £36,000, producing a net “give” figure of £28,410.

How the tax burden is shifting

The total number of income tax payers is falling. HM Revenue & Customs reckons that between the tax years 2011-12 and 2013-14, the number of income tax payers has dropped by 900,000 to 29.9 million. The explanation is the Government’s increase in the threshold before which any individual pays tax.

But, while greater numbers of lower-income households don’t pay any income tax at all, many more are paying upper rates of tax. HMRC reckons that the number of taxpayers in the higher and additional rate brackets will rise from 3.8 million in 2011-12 to 4.7 million in the current tax year, ending on April 5.

The burden on very top earners is more acute. The IFS said that in 1980 the top 1pc of earners paid 11pc of all income tax, a proportion that has leapt to 30pc. The IFS warned that this made for an “unstable” tax system, and even HMRC has indicated that receipts from higher earners are less predictable, in part because wealthy people can easily emigrate.

Tina Riches, a partner at Smith & Williamson, described Britain’s tax and benefit system as “progressive and arguably advanced” but said the analysis “demonstrated that a relatively small population is responsible for giving support to a great many people”.

There is also a regional bias, with more taxpayers living in London and the South East (see graph). As increased taxes are derived through inheritance tax, stamp duty and other property-related transactions, there is a growing sense of unfairness about the burden falling on those regions where property values are highest.

How to pay less tax on your investments and pensions

The period from now to the April 5 tax year end is a busy one for those wanting to reduce as far as possible their tax bill. People with the greatest scope to save are existing investors, who can pare back their bill by rearranging their holdings more tax efficiently, and those on sufficiently high incomes to be able to benefit from perks that come with certain investments.

Pensions

Topping up a pension nets immediate and future tax benefits, with higher-rate taxpayers getting both an uplift to their pension contribution now and a reduction in their future tax bill.

Most self-invested pension providers allow ad hoc lump sums to be contributed. A higher-rate taxpayer who pays in £1,000 now would have the sum automatically boosted by £250 – which the pension provider would collect from HMRC on their behalf. This reflects the 20pc basic-rate tax already paid on income (in other words, the £1,000 is treated as if 20pc has already been removed and is restored to £1,250).

But if you are a higher-rate taxpayer another £250 can be set against your income tax for this tax year (ending April 5 2014). There are two ways to receive this money. You can either inform HMRC of your contribution so the rebate can be factored into your PAYE tax code and enjoyed in the form of higher monthly income or, possibly easier, add the details of the contribution to your tax return for this tax year, with the effect of reducing the bill payable by January 31 2015.

Your Money has previously published a matrix of self-invested pension providers indicating which offer the best prices for savers with different sizes of portfolio. This can be viewed online, along with the equivalent table relating to Isa accounts, at telegraph.co.uk/investing.

Isas

Unlike pension contributions, money paid into Isas can be withdrawn at short notice, if needed. This means that putting money into an Isa for this tax year, if you have not yet reached the maximum subscription limit, could be worthwhile, even when there is a possibility of needing it again soon.

Even when you have a stocks-and-shares type Isa, provided by a broker or fund supermarket, it is possible to keep money in the form of cash within your Isa account – although the interest it earns will be less than can be paid on good cash Isas.

Your Money is currently campaigning for the whole Isa system to be simplified so that these distinctions do not have to be made.

Moving other investments not currently in an Isa inside one can help reduce future tax bills. Once within an Isa, investments won’t be liable for any capital gains tax. Holdings can also be switched in future years to produce more income – for example by being invested in corporate bonds – which again will be free of further tax. Married couples might want to share investments between them to make full use of both their annual allowances.

Other investments

An unusually large number of venture capital trusts – funds that invest in certain companies, which cannot be above a certain size – are currently raising money from private investors. Savers, in turn, benefit from a 30pc tax rebate. As with pension contributions this needs to be collected via a self-assessment tax return.

Income paid by VCT holdings, which can be as high as 8pc per year, is tax-free provided that the holding is retained for five years. Sums of as little as £3,000 can be invested via most major brokers. Certain brokers – such as Bestinvest and Charles Stanley Direct – also provide analysis of the different funds available and how they work.

VCTs are open to investors only for short periods, usually coinciding with the end of the tax year. Many favour particular themes such as health care, technology or renewable energy. For more information, including recommendations, visit telegraph.co.uk/vct.